Rothbard writes about the perils of turning gold and silver into paper notes
Author : Vivek Kaul/DNA
We all use money in our everyday life. But how did the idea of money come around in the first place. How did society first get around to the idea of having money as a medium of exchange?
The late American economist Murray N Rothbard has explained this in great detail in his book — What Has Government Done to Our Money? The book was first published in 1963 and remains as relevant now as it was then.
As Rothbard writes, "Clearly, Robinson Crusoe had no need for money. He could not have eaten gold coins. Neither would Crusoe and Friday, perhaps exchange fish for lumber, need to bother about money. But when society expands beyond few families, the stage is already set for the emergence of money."
Humans first exchanged goods through the barter system of direct exchange. But the barter system had its problems. As Rothbard writes, "The two basic problems are "indivisibility" and the "lack of coincidence of wants."
Thus, if Smith has a plow, which he would like to exchange for several different things— say, eggs, bread and a suit of clothes — how can he do so? How can he break up the plow and give part of it to a farmer and another part to a tailor? And think about the plight of an economics teacher who has to find an egg-producer who wants to purchase a few economics lessons in return for his eggs."
All these problems ensured that humans needed a medium of exchange that was acceptable to everyone. Various commodities over the years have been used as money. These include — "tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt and grain, beads, tea, cowric shells and fishhooks."
But, each of these commodities had its own set of problems in being used as a medium of exchange. "Through the centuries, two commodities, gold and silver, have emerged as money in the free competition of the market, and have displaced the other commodities," writes Rothbard.
Money in the form of gold and silver had its own set of problems. They were noisy, heavy and they wore out with use, leading to a decrease in their value. So, in the late 1690s, someone at the Bank of England had this brilliant idea of locking up all the gold and silver and issuing paper notes against it. Bank of England was the world's first central bank, set up in 1694. The paper notes it issued could be converted back to gold and silver coins at any point of time.
But pretty soon, the weakness of the system started to come out. The bank issued more notes than what was backed up by real gold and silver they had with them. People soon figured this out and wanted their gold and silver back.
To manage the situation, Sir Isaac Newton, the famous physicist, was brought in as the Master of the Mint in 1699. He fixed the value of one ounce (around 28.35 gram) of gold to a little over three pounds. This was how the first currency system based on a gold standard was built.
The problem with having commodities such as gold and silver as a medium of exchange or even having a currency system that followed the gold standard was that governments could not create money out of thin air.
To get around this problem, governments around the world started to promote the idea of money as "abstract units." "Nearly everyone, for example, thinks of money as abstract units for something or other, each cleaving uniquely to a certain country…American money was "dollars," French was "francs," German "marks," etc. All these were admittedly tied to gold, but all were considered independent, and hence it became easy for countries to 'go off the gold standard'."
When countries go off the gold standard, they can print any amount of money they want to. On August 15, 1971, the last gold standard that prevailed broke down. Since then countries have had the independence to print any amount of money they feel like and governments love that flexibility.
"Historically, money was one of the first things controlled by the government, and the free market "revolution" of the eighteenth and the nineteenth century made very little dent in the monetary space," writes Rothbard.
The gold standard essentially ensured that governments could not print money beyond a point. Like, now with no gold standard in place, the US government is simply printing more and more dollars to counter all the financial problems that are cropping up. The United Kingdom also has been using the printing press big time.
As the US prints more dollars, the supply of dollars in the market is increasing and this over a period of time will lead to the value of the dollar against other currencies going down.
Expecting this, investors and central banks of other countries have started putting their investments into physical assets such as gold, so the price of gold has been spurting up. Other than this, imagine what will happen, when all the money that is being printed actually hits the market? Prices will go through the roof.
These are the perils of turning what are essentially a commodity into a piece of paper.
This book can be downloaded free of cost from the following web address: http://mises.org/money.asp
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